Robert Shiller tries to understand why stocks are ‘very expensive’

“The United States stock market looks very expensive right now.” And with that, Yale professor Robert Shiller is at it again, telling us to worry.

He’s got plenty of company these days among those who fear this bull market can’t possibly keep going. Shiller’s particularly uncomfortable about the CAPE ratio (cyclically adjusted price-earnings), a stock-price measure that he helped create. He said something similar in June. (Just Google Robert Shiller bubble for more instances of his bubble theories.)

Otherwise known as the Shiller P/E, the ratio basically takes average inflation-adjusted earnings for the S&P 500
/quotes/zigman/3870025/realtimeSPX over the previous 10 years. In Shiller’s New York Times article from Saturday, he notes that when he touched on this topic over a year ago, that ratio stood around 23, far above its 20th-century average of 15.21. It now stands at 25, a level that since 1881 has only been surpassed in three other periods — the years surrounding 1929, 1999 and 2007. And we all know what came next after the market peaks in those years.

Shiller says the CAPE was never intended to indicate timing on when to buy and sell, and that the market could remain at these valuations for years. But given that this is an “unusual period,” investors should be asking questions, he says.

His question: Given that the ratio shows valuations have been elevated for years, are there legitimate factors that could keep stock prices high for decades longer? He points that his own questionnaire surveys show investors are getting more worried. Other than that, unfortunately there is no “slam-dunk” explanation for these high valuations, says Shiller.

Analysts at Bank of America Merrill Lynch said they remain constructive on the S&P 500, which is trading at a forward P/E multiple of just over 15. They said that’s not out of whack with its historical average, though, of course, they don’t address the Shiller P/E.

On Main Street (otherwise known as the reader comments attached to the New York Times article), theories abound:

“…The liquidity pumped in by the Fed is making valuations based on fundamentals impossible…” — Ashwin Kalbag.

“…Many are concerned that they might lose their jobs to cost-cutting, or that they might eventually be replaced by a computer or robot or website. Such anxiety might push them to try to make up for these potential shortfalls by investing in stocks and bonds — even if they worry that these assets are overvalued.” — david

“…Stocks are all we have. And there is a lot of cash on the sidelines to support values.” RBA

And one reader pointed out that really, what on earth do you do with Shiller’s type of analysis if you’re a truly long-term investor, thinking 10 to 40 years ahead?

“…I had a friend who, in around 1997, looked at ratios like Shiller’s and cashed out of stocks when the Dow approached 6,000. He was absolutely right, the market was severely overvalued — but meanwhile, the Dow zoomed to 11,000 — and even in the great correction of 1999-2000 never sniffed 6,000 again. ” — Tom

Over on Twitter:

Here’s Shiller in 2009 talking about how human psychology drives the economy:

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